Investors lose on Texas electric utility stakes

DALLAS — Private equity investors who bought Dallas-based electric utility TXU Corp. five years ago now see the company worth less than the $45 billion they paid and mired in debt.
Nevertheless, the company now called Energy Future Holdings is making multimillion-dollar retention bonus payments to executives and cash payments to private equity holders, The Dallas Morning News reported.
Warren Buffett recently apologized to Berkshire Hathaway shareholders for spending about $2 billion on EFH bonds, which are now worth about $878 million, and conceded even that could be wiped out. Private equity firm KKR has written down its EFH investment’s value by 95 percent.
Experts say the company and its investors were ambushed by plummeting natural gas prices and the effects on wholesale electric power prices.
“What brought Energy Future Holdings … to this sorry state of affairs is the wholly unexpected events around natural gas,” Colin Blaydon, director of Dartmouth College’s Center for Private Equity and Entrepreneurship, told the newspaper. “I mean, nobody saw this coming.”
The development of hydraulic-fracturing technology has freed up vast amounts of natural gas in already exploited fields in Texas and the Northeast. In February 2007, when KKR and private equity partners TPG and Goldman Sachs announced their offer to buy TXU in the biggest leveraged buyout in history, natural gas futures were trading at $7.55 per million BTUs. Now, they are trading at around $2.
“Everybody and their brother said natural gas would be $5 to $6, somewhere in that range,” ahead of the buyout, GF Energy LLC head Roger Gale told the newspaper, which had hired his consulting firm to study the buyout in 2007. “If that one single number turns out not to be correct, as it turned out to be, the economics go kablooey.”
The lenders, such as Berkshire Hathaway, have been the losers so far. In March, Fitch Ratings said “some kind of default seems inevitable” with $3.85 billion in debt coming due in 2014.
EFH “has managed as well as any company the pressures of historically low natural gas and wholesale power prices and a sluggish economy,” EFH spokesman Allan Koenig told The News in an email.
EFH operating revenue has fallen from $10 billion in 2007, with assets of $64.8 billion, to $7 billion in operating revenue and $44.1 billion in assets last year. Meanwhile, KKR, TPG and Goldman Sachs shared $37 million in 2011 for “management, consulting, financial and other advisory services” in a fee that increases by 2 percent each year, according to filings with the U.S. Securities and Exchange Commission.
Chief executive John Young earned a $1.2 million in base salary and a $1.73 million bonus last year.
“To keep management from bailing and going somewhere else, to have any chance of saving the ship, they start giving these ‘golden parachutes’ to them to stay,” said Jim Nolen, a lecturer at the McCombs School of Business at the University of Texas at Austin.
Customers are unlikely to have their electric service at stake, but the price of that service is likely to climb. “They’ll wind up having to pay a lot more money to whomever winds up taking over,” Gale told The News.